Members' voluntary liquidation before April 2027: BADR timing

Owners who plan to close a company through a members’ voluntary liquidation (MVL) have a reason to look at timing before April 2027. The Business Asset Disposal Relief (BADR) lifetime limit falls from £1 million to £500,000 for qualifying disposals made on or after 6 April 2027. Timing is not the only issue. Anti-forestalling rules and a winding-up anti-avoidance rule both limit what rushing can achieve.

What changes on 6 April 2027

BADR reduces Capital Gains Tax on qualifying business disposals to 18%, the rate for gains from 6 April 2026. Today the relief is limited to £1 million of qualifying gains over a lifetime. HMRC’s note confirms that limit becomes £500,000 for qualifying disposals made on or after 6 April 2027. Gains above the limit are taxed at the normal Capital Gains Tax rates of 18% and 24%.

The lifetime limit counts relief already claimed, so a past claim reduces what remains. HMRC expects about 13,000 of roughly 51,000 claimants to be affected, with 75% unaffected.

A worked example

This illustration assumes the shareholder pays Capital Gains Tax at 24% on any gain not covered by BADR. It ignores the annual exempt amount, previous claims and the basic rate band.

The cost is the £300,000 of gain that loses relief multiplied by the 6 percentage point difference between 24% and 18%.

What BADR requires

The GOV.UK guidance sets the conditions. Selling or closing a business requires two years of ownership up to the date of sale or closure, and the assets must be disposed of within three years of closing. For shares in a personal company, you must hold at least 5% of the shares and voting rights and meet the entitlement tests set out in the guidance, for at least two years before the disposal. If the company stops trading you can still qualify if you sell the shares within three years.

HMRC’s tax information and impact note does not mention liquidations. It does not say how the disposal date is set for a distribution in a winding-up. Do not assume that a liquidation started before April automatically settles before the cut-off. Ask whether the facts and the timing of the distributions fit the rules.

The forestalling rules

HMRC will introduce rules for arrangements made to get ahead of the change. They apply to unconditional but uncompleted contracts entered into before 6 April 2027. Gains eligible for BADR on those contracts are subject to the £500,000 limit unless:

• the parties can show they did not enter the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992, and
• where the parties are connected, the contract was entered into for wholly commercial reasons

A statement must be made where the gain exceeds £100,000. A further rule covers share reorganisations where a person elects to disapply the no-disposal rules so they can claim BADR on or after 6 April 2027. In that case the disposal is treated as happening when the election is made, so the £500,000 limit applies.

The winding-up TAAR

A members’ voluntary liquidation also needs the targeted anti-avoidance rule in section 396B of the Income Tax (Trading and Other Income) Act 2005. HMRC’s manual describes the target as “phoenixism”, where a person winds up a company, takes the profits as a capital distribution, then restarts the business in a new company.

The rule treats a distribution in a winding up as an income distribution when all four conditions are met:

1. The individual had at least a 5% interest in the company before the winding up.
2. The company was a close company at some point in the two years ending with the start of the winding up.
3. The individual continues to carry on, or be involved with, the same trade or a similar one at any time within two years of the distribution.
4. It is reasonable to assume that avoiding or reducing an Income Tax charge was a main purpose, or one of the main purposes, of the winding up.

The rule does not apply to the extent that the distribution would not give rise to a gain for Capital Gains Tax. The fourth condition turns on purpose, so the reasons for the winding up matter.

What advisers should do

1. Do not rush a closure for tax reasons alone. The forestalling rules and the TAAR both test purpose.
2. Confirm BADR eligibility first. Check the ownership periods and the trading status.
3. Quantify the cost of waiting. Use the cap and the gain to see how much relief is at stake.
4. Document the commercial reasons for any decision to close, and for the timing.
5. Agree the timetable with the liquidator. Ask how and when the distributions will be made.

Our guides cover the background on the BADR lifetime limit, Business Asset Disposal Relief and how to dissolve a limited company.

Frequently asked questions

When does the BADR limit fall to £500,000?

It falls for qualifying disposals made on or after 6 April 2027. Disposals before that date keep the £1 million lifetime limit.

Does an MVL start before April 2027 protect my BADR limit?

Not automatically. HMRC’s note does not address liquidations, and the forestalling rules test purpose. Check how the disposal date is set for your distribution and take advice.

What is the winding-up TAAR?

It is a rule that can treat a distribution in a winding up as an income distribution if you carry on a similar trade within two years and avoiding Income Tax was a main purpose.

Is the BADR rate changing?

No. The rate is 18% for gains on qualifying disposals from 6 April 2026, and the Budget change affects only the lifetime limit.